1. A US-based corporation has decided to make an investment in Sweden, for which it will require a sum of 100 million Swedish kronor (SEK) in three-months ' time. The company wishes to hedge changes in the US dollar (USD)-SEK exchange rate using forward contracts on either the euro (EUR) or the Swiss franc (CHF) and has made the following estimates:

• If EUR forwards are used: The standard deviation of quarterly changes in the USD/SEK spot exchange rate is 0.007, the standard deviation of quarterly changes in the USD/EUR forward rate is 0.018, and the correlation between the changes is 0.85.
• If CHF forwards are used: The standard deviation of quarterly changes in the USD/SEK spot exchange rate is 0.007, the standard deviation of quarterly changes in the USD/CHF forward rate is 0.023, and the correlation between the changes is 0.90.

Finally, the current USD/SEK spot rate is 0.104, the current three-month USD/EUR forward rate is 1.071, and the current three-month USD/CHF forward rate is 0.602.

(a) Which currency should the company use for hedging purposes?

(b) What is the minimum-variance hedge position? Indicate if this is to be a long or short position.

6. You use silver wire in manufacturing. You are looking to buy 100,000 oz of silver in three months' time and need to hedge silver price changes over these three months. One COMEX silver futures contract is for 5,000 oz. You run a regression of daily silver spot price changes on silver futures price changes and find that

S=0.03+ 0.89F+

What should be the size (number of contracts) of your optimal futures position. Should this be long or short?